Labour's mutual friends

Iain Dey examines the close links between the Co-operative Bank and the Labour Party

It bills itself as the ethical bank, campaigning against human rights abuses, maintaining a firm stance against animal testing and genetically modified crops. But now the Co-operative Bank has found itself caught on the fringes of a scandal that has sent shock waves through Government, and threatens to bring an end to Tony Blair's premiership.

As the Labour Party's banker, the Co-op Bank finds itself uncomfortably close to the "loans for honours" affair. While Blair was arranging loans from friendly businessmen, the Co-op Bank was extending Labour's overdraft facilities to £11m and lending money secured on the party's empty headquarters in Westminster.

The Co-op Bank has links, both financial and personal, deep inside the Labour machine, particularly with Gordon Brown, the Chancellor of the Exchequer, Ed Balls, his former right-hand man, and a slew of influential MPs, Lords, MSPs and members of the Welsh assembly.

Just how much the bank knew about the secret loans being arranged on behalf of one of its oldest and most loyal clients remains unclear because it refuses to say. If it did not know about the loans, it must be pretty angry as it is normal practice for big customers to disclose all debts to their principal banker.

The Co-op Bank is by no means a heavyweight. It has about £10bn in assets and 500,000 retail customers. It runs the internet bank Smile. It is also one of the biggest bankers to British football clubs, having loaned a combined sum of £100m to seven clubs over the past decade, including Bolton Wanderers, Manchester City and Celtic.

In 2004, the latest figures available, it made operating profits of £132m - pocket change relative to the billions earned by the big five high street banks. Its bad debts were 0.82 per cent of its total book, about normal for the industry.

It refuses to discuss the nature of its relationship with the Labour Party, other than to confirm that it is a commercial customer. And "like all large corporate customers, the terms of any loans or overdrafts would be decided through a process of negotiation," a spokesman said.

When Mervyn Pedelty, the bank's chief executive, suddenly took early retirement in December 2004, he popped up in the New Year's honours list with a knighthood.

Alongside Co-operative Insurance Services (CIS), the Co-op Bank is the financial wing of The Co-operative Group, the Manchester-based organisation that runs 1,800 food stores across the UK, a travel agency, a chain of car dealerships, and a network of 600 funeral homes - among other things. Its origins are among the self-help organisations of the 19th century.

Across all its operations, the Co-operative Group generated operating profits of £243.7m in 2004 on sales of close to £8bn. Aside from its acquisition of the Alldays chain in 2002, its only major spell in the headlines was in 1997, when Andrew Regan, the entrepreneur, made a controversial and failed attempt to buy the group for £1.2bn.

The Co-operative Group does not account for all of the co-operative organisations in the UK, but it is the largest. It is owned by its 3m members, who control it through a network of regional committees that elect a controlling board, which subsequently employs a management team.

But the real voting power lies with 40-odd corporate members - independent co-operative organisations that are, in effect, its institutional shareholders.

The Co-op Bank has its own board, chaired by Graham Bennett, the chief executive of Southern Co-operatives; the chief executive is David Anderson. And it is regulated by the Financial Services Authority, like any other bank.

The distribution of votes at the Co-op also reflects the distribution of profits - dividends are paid on a sliding scale, according to the amount of trade that each of the corporate members has done with the group. The individual members currently receive a flat dividend.

The Co-op group is also unlike normal companies in as far as it makes regular, generous political donations to the Labour Party and its affiliates.

Just after the General Election in 2001, The Co-operative Group donated £50,000 to Labour, according to records at the Electoral Commission, followed by a few smaller ones, then a further £50,500 in May 2004. Since 2001 it has donated around £140,000 - far less than many of Labour's entrepreneurial friends, but a considerable sum nevertheless.

It also runs a Labour Affinity Card, which has raised £1.5m for the party coffers. The Co-op Bank insists this is a purely commercial arrangement, and stresses that it offers the same service to the Liberal Democrats.

But the bank's website gushes that using the card can "help the Labour Party's efforts to create a fairer society for all". Such evocative language is not offered to the Lib Dems.

But that is only part of the story. The Co-operative Group also donates an average of £300,000 a year to The Co-operative Party, an independent organisation affiliated to the bank only through the broader "co-operative movement". In 2004 the donation was closer to £500,000.

While the Co-operative Party is a separately registered party, it is very much part of the Labour universe, with representation in Parliament.

According to Peter Hunt, the general secretary of the Co-operative Party, roughly 80 per cent of the Parliamentary Labour Party are also members of the Co-operative Party. The chancellor is among them, although Blair is not.

Although it is a separate party, all the candidates the Co-operative Party puts forward for election are nominated jointly as Labour and Co-operative candidates under an agreement that has lasted since 1926. There are currently 29 MPs who were elected on a joint Labour/Co-operative ticket - a significant body of influence within a party that has a majority of just 65.

Donations received by the Co-operative Party are used to fund election campaigns at a constituency level, with the funds paid to the constituency party rather than the candidates. But all the donations received by the Co-op Party, after running costs, go to Labour/Co-operative candidates.

Balls is one of the Co-op MPs, along with Alun Michael, the Industry Minister and John McFall, the chairman of the influential Treasury Select Committee. In the upper chamber, its representatives include Lord Moonie, the former junior defence minister, who had a key role in the privatisation of Qinetiq, and Lord Foulkes, the Blairite former Minister of State at the Scottish Office.

Despite its close links with the Government, the Co-operative Party produces its own manifesto, with its own ideas - the most recent of which was unveiled by Brown in March last year. Among its policies was a call for both the BBC and utility companies to be converted to mutual organisations owned by consumers.

The relationship between the Co-op Party, Labour and the Co-op Bank has rarely been called into question. When the Treasury Select Committee investigated cash machine charges in 2005, it decided not to haul the bank before the committee to give evidence, even though 90 of its 2,000 cash machines levied a charge on consumers for withdrawing money. McFall insisted this was simply because the committee had limited time and there were bigger fish to fry, but the decision raised some eyebrows in the City.